Magazine

Latin America: It's In Play Again, Too

March 21, 2004

First came the global market swoon. Then a year ago a leftist labor activist rose to the presidency of Brazil, South America's largest economy, and Argentina devalued its peso and defaulted on its foreign debt. As a result, big European and American companies that bought up hundreds of Latin businesses in the 1990s abruptly pulled back. "Two years ago everyone wanted to get rid of anything with 'Latin America' written on it," says Nicolas Aguzin, head of Latin American mergers and acquisitions for J.P. Morgan Chase & Co. (JPM).

Now, Aguzin notes, all that has changed -- in no small part because of Brazil President Luiz In?cio Lula da Silva's measured economic stewardship. And while Argentina is still shunned by most investors, Mexico's stable economy is drawing more and more foreign money. "International companies are looking at the region with much friendlier eyes," Aguzin says.

They're not just looking; they're dealing. On Mar. 8, Telef?nica, Spain's biggest telephone company, agreed to pay $5.85 billion in cash and assumed debt to acquire BellSouth Corp.'s (BLS) wireless operations in Latin America, making it one of the largest wireless operators in the region. Just a few days earlier, Belgium-based Interbrew and Brazil-based Companhia de Bebidas das Americas (AmBev), which makes Brahma brand beer, agreed to an $11.2 billion merger, while giant retailer Wal-Mart Stores Inc. (WMT) paid $300 million for Brazilian chain Bompre?o. All told, as much as $50 billion in M&A is expected this year in Latin America, says Thomson Financial, a steep rise over last year's $27.8 billion. "We're seeing multinationals coming back to the region with a lot of appetite for investment," says Eduardo Centola, co-head of Latin American mergers at Goldman Sachs Group Inc. (GS).

Even if all those deals come off as expected, their total value will still be less than half the $107 billion registered at the peak of Latin merger mania in 2000. That burst of investment was largely centered on a utilities privatization and telecommunications boom in Brazil. This time around, foreign investors are wading back in to tap growing consumer markets and take advantage of the high price of commodities. Demand from China, for instance, is a boon to pulp, paper, and steel companies. Companhia Vale do Rio Doce (RIO) (CVRD), the world's largest iron ore producer, recently announced a joint venture with Chinese steelmaker Shanghai Baosteel Group Corp. to build a $1.4 billion integrated steel plant in northern Brazil.

The dealmakers also expect a more robust economy to justify their planned mergers. After expanding just 1.5% in 2003, Latin America as a whole is forecast to grow around 3.5% in 2004. That has triggered a 113% runup in the Brazilian stock exchange over the past year and a 70% climb on the Mexican bourse. Despite the higher share prices, European multinationals are taking advantage of a strong euro to increase control of companies in which they were already invested. Spanish bank Banco Bilbao Vizcaya Argentaria (BBV), for one, recently made a $4 billion bid to buy out the rest of Grupo Financiero BBVA Bancomer, Mexico's biggest bank. And Swiss cement maker Holcim Ltd. (HCMLY) made a $749 million offer in January for the outstanding shares in Apasco, its Mexican cement operation.

"It's a very good year," says Martin Sanchez, Goldman Sachs' other co-head for Latin mergers. "We continue to see a very full pipeline for the remainder of [2004]." With the wild currency fluctuations and economic doldrums of the past few years fading rapidly, Latin America Inc. is once again in play. By Geri Smith in Mexico City